Growing bipartisan consensus: State has a revenue problem

House Speaker Lee Chatfield (left) and Senate Majority Leader Mike Shirkey have spent the summer studying different options for generating at least $1.5 billion more annual funding for roads and transportation infrastructure. They’ve both expressed interest in refinancing debt payments for teacher pensions through a $10 billion pension bond.

The willingness of Republican legislative leaders to consider borrowing $10 billion and pumping the cash into the public-school employees' pension fund is driven by an alarming projection that the state's contribution to the retirement system will soar by a staggering $1.5 billion within five years.

GOP leaders and a conservative business group pushing the plan say action must be taken now to shore up the Michigan Public School Employees' Retirement System because the state's School Aid Fund can't shoulder the fast-approaching pension fiscal cliff in 2024 without legacy costs consuming additional direct aid for classroom instruction.

"Most people in the state don't realize that the first $3.5 billion that we give to the School Aid Fund goes to pensions," House Speaker Lee Chatfield told me in a recent interview. "And that number will quickly rise to $5 billion per year unless we address that issue."

Chatfield's argument for legislative intervention now to slow the growth of these retirement costs is the first tacit acknowledgment by Republicans in charge of the Legislature's purse strings for the past decade that state government indeed has a revenue problem.

This pension-bonding scheme from the West Michigan Policy Forum has inadvertently exposed a truth neither Democrats and teachers unions nor Republicans and big businesses in this state can continue ignoring: The stagnantly growing state of Michigan is going broke.

Michigan is underfunding roads.

It is underfunding schools, according to toomanystudiestocount, and it will only get worse when those pension costs escalate.

And Michigan is certainly shortchanging cities, which have seen $8.6 billion in revenue-sharing vanish over a decade of disinvestment, according to the Michigan Municipal League.

Those are just the basic responsibilities of government Michigan's existing tax sources are falling short of supporting.

The underlying goal of this pension-bonding scheme is to free up nearly $900 million in existing revenue by refinancing the "mortgage" of pension liabilities from the 20-year payment plan former Gov. Rick Snyder set up to a 30-year payment schedule. (It's sort of breathtaking to see how quickly Republicans have moved to undo Snyder's fiscal prudence.)

Democrats, teachers unions and the school lobby are railing against tinkering with their pensions, and yet neither have offered a plan for shoring up a pension system that's $30 billion underfunded.

Republican legislative leaders have been entertaining this pension-funding idea, in part, because they want that $900 million in annual savings to redirect it to the roads to achieve Chatfield's goal of removing the sales tax on gasoline.

They also like the idea of imposing fiscal discipline on Democratic Gov. Gretchen Whitmer so she can't skip pension payments like former Gov. Jennifer Granholm did when the state was mired in a single-state recession.

But this budgetary gymnastics is all designed to avoid raising taxes — which would risk angering voters in the next election, in which neither Chatfield nor Senate Majority Leader Mike Shirkey will be on the ballot because they're term-limited.

By Chatfield's own admission, the state can't afford the forthcoming pension bill.

That's because over the past 20 years, the School Aid Fund's annual tax revenue growth has been $1 billion under inflation. The underlying fear is if the $1.5 billion pension bill comes due in five years during a recession, it will plunge the state into a major budget crisis.

But instead of looking deeply at how public education is financed in Michigan, legislative leaders are focused on refinancing the existing long-term debt. Most people in business would consider this an act of kicking the proverbial can down the road.

But that day of reckoning is fast approaching. The next economic downturn will inevitably bring new pain to cities and public school districts, which rely heavily on growth in property taxes and consumer spending (sales tax) for sustained funding.

There will be more Inksters, Buena Vistas and Benton Harbors that pile up operating debts that can't plausibly be repaid, resulting in defaults and destabilization.

Not many of Lansing's current leaders are considering what happens in the next recession. Their time in office is so short, it's hard to take the long view.

In fact, not a single current Republican or Democratic legislative leader was in the Legislature during the 2008-2009 Great Recession — a reflection of both Michigan's short term limits and the long decade of economic expansion.

But the short view is what gave Michigan motorists the worst roads in America, underfunded pensions for school retirees, a growing talent shortage and K-12 educational outcomes in the bottom 10 states instead of the long-desired stratosphere of Top 10 State status.

Barton Malow Enterprises Chairman Doug Maibach, who was part of the one of the most recent studies of education underfunding, said lawmakers should consider both bonding to shore up the teacher pension and issuing bonds to frontload roads and infrastructure improvements.

"Roads are long overdue, and the pension funding is a ticking bomb," Maibach said in an email. "The retirement commitments that have been made in the past are not sustainable in a low growth state like Michigan."

With no deal in sight on road funding between Shirkey, Chatfield and Whitmer, the next two weeks are seen as critical to getting a deal before September, when the 30-day budgetary clock starts ticking.

The Republican leaders and Democratic governor have mutually agreed to a goal of $1.5 billion more, according to three sources familiar with their ongoing negotiations.

"In some ways it's easier to agree on the target and then figure out how to hit it than it is to build an agreement piece by piece," said Rich Studley, president and CEO of the Michigan Chamber of Commerce. "We think the closer they get to $2 billion the better, the more positive impact it will have."

The state chamber is pushing for a long-view solution on roads.

Business leaders like Maibach want long-view solutions on roads and pensions that can weather the next recession.

The next few weeks will reveal which elected leaders in Lansing are still taking the short view on the state's future and its revenue problem.